Renegade Report: Goldman Sachs sees more telecom growth

CBS.MarketWatch.com

LONDON (CBS.MW) -- Germany's Neuer Markt for growth companies should continue its "spectacular performance" of the last two years over the next 12 to 18 months, said Goldman Sachs analyst David Abraham.

The Neuer Markt is up 560 percent since its inception in 1997, he said, and is poised for continued growth thanks in part to its composition of high-growth stocks, currently dominated by software companies. Software stocks represent 25 percent of the issues on the exchange and 29 percent of its market capitalization, he said. Also going for it are the fact that the Neuer Markt has stringent listing criteria, greater liquidity than rival exchanges, and a huge volume of new issues -- 140 this year, and at least 100 likely in 2000, Abraham said.

Still, there are downsides. For one, the market may be saturated with new issues at this point, Abraham said. Nine IPO's slated for the Neuer Markt were aborted this year during the book-building stage, and 45 percent of its IPO's since July first are trading below their issue price. Also, the market's relatively immature, "bearing all the hallmarks of an unruly teenager," he said. Plus, the competition's heating up from the Easdaq, London's new Techmark index, and the upcoming Nasdaq Europe.

Net financial services poised for growth

Internet financial services operators are well-placed to continue growing in Europe next year, but the banking industry won't necessarily benefit in the near term, said Richard Ramsden, London-based analyst at Goldman Sachs,

Growing Internet penetration across the region, increased focus on cost over brand, and shifting long-term savings patterns along with the formation of a European equity culture will all drive the growth of online financial services, Ramsden said. "Next year will be a landmark year, with a shift out of transaction processing into online wealth management," he added. "Europe's just scratching the surface of business models at this point. Next year, you'll see more business-to-business and infrastructure plays."

Still, it's "difficult to see in the near term how this is positve for the banking industry," he said. Banks need to lower prices in order to attract customers to online services, while simultaneously spending big to build those Net services, he said. The Internet revolution is also spelling the end of the universal banking model, where customers seek all services under one roof. Now that pricing's becoming increasingly transparent thanks to the Web, consumers are willing to shop around, Ramsden warned.

Techno combos

Consolidation in the European technology sector is likely to cross traditional industry barriers in the year to come, predicted Goldman Sachs analyst Richard Kramer. Wireless companies, computer services companies, and components manufacturers will increasingly combine with one another, rather than marrying up with peers in their own fields, he said.

In the wireless industry, Kramer suggests investors "forget about the mobile phone. Think instead about wireless devices." He believes consumers will add to their collections of wireless devices -- adding a WAP phone that can surf the Net, or a palm-top computer, for instance. The stocks of Ericsson AB
ericy
and Nokia Oyj
NOK, -0.17%
in particular should continue to perform well in 2000, he said. IT services companies, for their part, should soon be putting Y2K behind them, and now face the challenge of hiring and keeping highly-skilled employees, he said. "Recruitment, not the pipeline, is the main challenge," he said.

Generally speaking, Kramer says the European marketplace has a lot going for it: the culture limits labor mobility, which will help companies retain skilled staff; trading liquidity is lower, which "forces people to make fundamental decisions, not on-the-spot decisions;" there's a rising equity culture; scarcer capital has maintained quality standards in IPO's and venture capital; and he believes the region has more "analytical integrity" than the U.S., in part because analysts are less specialized.

For one thing, there'll be a number of new entrants on the scene. Sawtell said for starters there's the newly merged Scandinavian giant Telia-Telenor, which he thinks could command a valuation of $40 billion to $50 billion.

Other growth drivers Sawtell sees include gross domestic product (GDP) expansion, the boom in traffic between fixed and mobile phones, and the growth of the Internet. Traditional carriers will be among the big beneficiaries of Net growth, he said.Deutsche Telekom's T-Online Internet service provider (ISP) for instance, is expected to float next year and could be valued at 30 billion euros or higher, he said.

Deutsche Telekom
dt
is also one of Sawtell's top picks for 2000, as are Spain's Telefonica SA
TEF, -0.80%
British Telecommunications PLC
BTY, +15.71%
and Swisscom AG
SCM, -0.59%
"Focus on incumbents with strong international strategies, attractive valuations and strong ADSL (digital subscriber line) skills," he told investors.

Finding value in banks

Goldman Sachs is favoring "value over growth" in European bank stocks for 2000, said David Townshend, the investment bank's European banking analyst. Despite an overall neutral take on the sector, Townshend says "there are pockets of considerable value."

His top three ideas for 2000 include Deutsche Bank AG because it's undervalued, should wring considerable value out of its Bankers Trust acquisition, has a revamped management team and strong earnings momentum, he said.

Townshend also picks France's BNP-Paribas because it's attractively valued and should grow earnings strongly. Yet he said investor's have low expectations of it, thus there's potential for upside surprise. Finally, Townshend likes the U.K.'s Alliance & Leicester PLC because it's more than the mortgage bank it's valued to be, it's more profitable than investors think, and it's accelerating a share buy-back plan, he said.

Friday's session was day two of the Goldman Sachs conference. Thursday, Goldman Sachs analyst Abby Joseph Cohen said U.S. stock prices will rise next year. See full story

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